Large-Scale Industry, 1850–1950

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LARGE-SCALE INDUSTRY, 1850–1950

LARGE-SCALE INDUSTRY, 1850–1950 The term "large-scale industry" refers to factories that combine at least three characteristics: use of machinery, employment of wage labor, and the application of regulatory measures such as the Factory Act or Disputes Act. These features were of recent origin in nineteenth-century India and, to a large extent, products of British colonial rule. In employment statistics, the units registered as "factories" under the Factory Act can be considered large-scale industry. In reality, the registered factories included a fair number of units that did not employ machinery, but with few exceptions, registered factories did possess the other two features.

Scale, Spread, and Composition

Employment in factories in British India increased from 317,000 in 1891 to 1,266,000 in 1938, or from 5 percent of industrial employment to 11 percent (it was 29 percent in 1991). The share of factories in real income generated by industry increased from about 15 percent in 1900 to 45 percent in 1947 (it was 55–60 percent in the mid-1990s). Factory employment in all princely states increased from 130,000 in 1921 to 299,000 in 1938.

Impressive as it was, the growth was an uneven one. Industries around Bombay (Mumbai) and Calcutta (Kolkata) accounted for about half of factory employment. Ahmedabad, Madras (Chennai), and Kanpur saw limited development of factories. In the interwar period, key resources such as capital, labor, knowledge, railway connection, and electric power were no longer concentrated, and industrialization began to spread. As much as 45 percent of factory employment in the early twentieth century was engaged in cotton and jute textiles. Other important groups included tobacco and leather. The share of chemicals, metals, and machinery was very small. Machinery and manufactured intermediate goods were still largely imported. From about World War I, a few bold industrial initiatives were taken, the Tata iron and steel venture being the most significant example.

Chronology

The first burst of investment in cotton and jute mills occurred in the third quarter of the nineteenth century. The capital came partly from foreign investment and partly from capital accumulated in the early-nineteenth-century trades in opium and cotton. The growth of India's trade with China after the British East India Company's monopoly in China trade ended (1834–1835) played an important role in the growth of mill enterprises. The U.S. Civil War (1861–1865), which cut off supplies of American cotton to Lancashire, created a boom in Indian cotton and large profits, part of which found its way into building cotton mills. A tea mania of a similar nature in Calcutta and a gold mania in Madras stimulated the local stock exchanges.

World War I was a landmark event. Massive excess demand for Indian goods developed, but at the same time, the flow of machinery, raw materials, spare parts, and chemicals normally imported from Britain or Germany stopped. The immediate impact of supply constraints was rapid inflation from which cotton, jute, and steel emerged as major gainers, though many other constituents of India's economy were heavy losers. Until the war, the British Raj had followed a hands-off policy with respect to Indian industries, and a buy-British policy with respect to all machines required for defense, railways, or administration. After the war, the government began to look toward local sources and became more open to promoting them. Three events that represent this shift in attitude are the establishment of the Indian Munitions Board (1918), the Indian Industrial Commission (1916–1918), and the Indian Fiscal Commission (1921–1922). All three bodies underscored the need to develop local capability, and endorsed the use of fiscal measures for that purpose. The Fiscal Commission sanctioned the use of protective tariffs for industrial promotion.

The interwar period saw rapid industrialization as well as mounting crises. Protective tariffs enabled dramatic growth in sugar, steel, cement, matches, paper and woolen textiles. Within older industries, such as cotton and jute mills, the period saw both the start of new firms in new locations as well as crises in old firms in old locations. Competition in textiles and steel was more intense in this period than before. In textiles, competition came from Japan and from many new mills that were started in small towns far from Bombay. The Indian nationalists convincingly argued that the rupee was an overvalued currency in the late 1920s. In steel, world capacity had advanced faster than demand. In jute, Indian capacity grew faster than world demand. The result in each case was low or fluctuating profits. Tariffs alone could not solve these problems. There were attempts to introduce new technology and management practices and to voluntarily restrict supplies.

The Great Depression thus came at a bad time for industries like steel, paper, sugar, cement, and jute. Yet turmoil in the financial market, caused by debt crisis and gold exports, led to a conversion of idle rural assets into industrial-commercial uses.

World War II again saw excess demand in the presence of supply constraints, and massive inflation. But Indian industry in 1939 was more diversified and better equipped to diversify than it had been in 1914.

Capital and management

Pioneers in modern industry came from communities that had specialized in trading and banking activities. On the west coast, the Parsis, Khojas, Bhatias, the Gujarati traders and bankers based in Ahmedabad, and the Bombay-based Baghdadi Jews were the early mill owners. Several of these communities had a history of collaboration with Europeans. Some had withdrawn from the maritime trade as European firms based in London took control of it. In Calcutta, and in North and South India, Europeans dominated import-export trade, banking and insurance, and eventually jute, engineering, mines, plantations, railways, power, and dockyards. Commodity trade, however, was not in European hands, but in the hands of Indian traders, chiefly the Marwaris. By the end of the interwar period, prominent Marwari firms in Calcutta had entered the jute industry, and on a smaller scale, sugar, paper, cement, construction, and share-broking. The European capitalists did not welcome this trend. Consequently, a schism opened in Calcutta's industrial-commercial world that took a toll when large European firms became targets of predatory takeovers shortly after independence.

Industrial capital was persistently scarce in India, and financial market institutions were undeveloped. The major government-backed Presidency Banks of the period did not supply long-term capital. Indian joint-stock banks were prone to bankruptcy. The informal money market served too narrow a clientele with too few instruments.

The British "managing agency system," wherein the owners of a company contracted its management to another firm for a fee was common in India since the nineteenth century. Principals and agents then belonged to a small network, but that situation changed when limited liability became popular beginning in the 1870s. The small shareholder could no longer monitor the managing agent, paving the way for mismanagement and fraud. Despite these problems, the system continued until 1970, in part because the agent facilitated loans and deposits. With the expansion of professional managers and the use of the "holding company" for control, the system became redundant.

Limits on industrialization

Large-scale industry entered the processing of natural resources, abundant and cheap in India, with knowledge imported from Britain. Machinery and intermediates did not develop to a comparable extent because Indian factories could more easily import than produce such things as electrical machinery, transport equipment, or heavy and fine chemicals. It could also import foreign technicians. India's import-dependence for technology and knowledge had weakened, however, by the mid-twentieth century. Significant changes came only after independence, with protection for the capital goods industries, and substantial government funding for higher and technical education.

Tirthankar Roy

BIBLIOGRAPHY

Bagchi, A. K. Private Investment in India, 1900–1939. Cambridge, U.K.: Cambridge University Press, 1972.

Morris, M. D. "The Growth of Large-Scale Industry to 1947." In The Cambridge Economic History of India, vol. 2: c. 1757–1970, edited by Dharma Kumar. Cambridge, U.K.: Cambridge University Press, 1983.

Ray, R. K., ed. Entrepreneurship and Industry in India. Delhi: Oxford University Press, 1994.

Roy, Tirthankar. The Economic History of India, 1857–1947. Delhi: Oxford University Press, 2000.

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